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Here's a question about Capital Gains Tax on a house we might sell.

About ten years ago my mother-in-law bought (for $35,000) a house next door to ours and put it in her own name and my wife's name jointly. Later, she transferred her interest in the house to me. After she died five years ago, my wife and I occupied this house along with our original house.

We own and occupy two adjacent houses. The original has remained the official residence.

We might sell the house ($60,000) my wife's mother bought and transferred to us. If we did, on what basis would capital gains be calculated and taxed? Once sold, the proceeds from the sale would be used to build an addition onto our original house. Does using the money in this way reduce liability for capital gains taxes?

Thanks for any help! JackH

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